Citi Moves One Step Closer To Toast (US May Take 40%+ Stake)


The government is in talks to convert most of its $45 billion of preferred stock in Citi (C) to common stock, the WSJ says. Other preferred shareholders might follow suit.

This plan would raise the government’s ownership of Citi to 40%+ from just under 8%.  Common shareholders would be severely diluted, especially if other preferred holders convert.

The FT puts the total possible preferred conversion at $75 billion. Citi’s common is currently worth $10 billion.  So, at the current price, the conversion would give the preferred shareholders almost 90% of the common equity.

The goal of these conversions would be to boost Citi’s tangible equity (by converting preferred, which is a hybrid debt-equity security, to common stock).

Bank of America (BAC) denies that similar talks are taking place with respect to its own stock, but the denial is far from categorical.  They’re probably coming.

This would be the third–third–government move to save Citigroup in the past six months. Once again, it seems a weak half-measure.  The goverment needs to just step up and solve this problem once and for all: By seizing 100% control of Citi, writing down its assets, restructuring it, and selling it off.

WSJ: Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn’t cost taxpayers additional money, but other Citigroup shareholders would see their shares diluted. A larger ownership stake by the federal government could fuel speculation that other troubled banks will line up for similar agreements.

Bank of America Corp. said Sunday that it isn’t discussing a larger ownership stake for the government. “There are no talks right now over that issue,” said Bank of America spokesman Robert Stickler. “We see no reason to do that. We believe the goal of public policy should be to attract private capital into the bank, not to discourage it.”

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The FT has a slightly different spin on the talks:

Citigroup is pressing the US government to agree on a new capital injection that would increase the authorities’ stake in the troubled bank to about 40 per cent but stop short of an outright nationalisation.

The talks come after Citi’s shares slumped last week as investors feared it would be nationalised. Citi insiders said they expected a decision on the company’s future in the coming weeks but warned that it would have to come earlier if its shares fell again in the next few days.

People close to the situation said Citi executives had been in discussions with regulators during at the weekend over a plan that would enable the government and other shareholders to convert up to $75bn of preferred shares into common stock.

According to its proponents, the injection of common stock would bolster Citi’s capital base while at the same time allaying market fears of a nationalisation. Under the plan, first revealed by the Financial Times last week, Citi could also try to raise fresh equity with a public share offering. The aim would be to keep the government stake to no more than 40 per cent or at least below 50 per cent, said people familiar with the plan.

People familiar with the plan said it would hinge on the price at which the government and other shareholders, which include sovereign wealth funds and Prince Al Waleed, convert their shares as well as how many of its $45bn-worth of shares the government converts.

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